OPEC Offers Olive Branch To U.S. Shale

Anybody who is anybody in the world of oil is gathering in Houston this week for the IHS CERAWeek Conference, an annual get-together of top industry analysts, executives and government ministers. The mood in Houston is notably different from a year ago, when oil prices languished in the $30s per barrel. Everyone can thank OPEC for the renewed sense of optimism.

At the conference, OPEC said that it would continue to be the “only catalyst” for balancing the market, a comment meant to emphasize OPEC’s significance after several years of infighting. But it was also a welcome assurance for shale producers hoping that OPEC will intervene for the sake of market stability.

OPEC also tried to assure the markets that compliance on the production cut deal has been high and will continue to rise. Russian officials added that in the coming weeks they will fully comply with the 300,000 bpd cut they pledged as part of the deal.

The OPEC deal succeeded in rallying oil prices and restoring a sense of bullishness in the oil market. Oil prices shot up into the $50s immediately after the announcement of the production cut in late November. But with oil prices flat so far this year, it appears that OPEC’s firepower is running out despite the impressive level of compliance with the promised cuts.

On the other hand, the OPEC deal is the only thing keeping oil prices afloat. The supply reduction of 1.2 million barrels per day, plus almost 0.6 mb/d from non-OPEC countries, is helping to bring down global inventories, but at a surprisingly slow pace. The comeback of U.S. shale is undermining the effectiveness of the deal. Related: Oil Prices Under Pressure From Record Breaking Inventories

The cuts are supposed to last until June, and there is growing speculation about a possible six-month extension of the deal because of the painfully slow adjustment in the market. It remains to be seen if OPEC will continue to shoulder the burden of correcting the supply overhang. But if they don’t, oil prices could fall to $40 per barrel, warned the CEO of Pioneer Natural Resources, a Texas shale driller. "If OPEC does not extend, we will see $40 oil," Pioneer CEO Scott Sheffield said in Houston this week. "That will have a major impact on future investments in the U.S. shale business."

At $40 per barrel, the strong gains in the U.S. rig count would reverse, with many shale basins in the country becoming uneconomic to produce, Sheffield added. It is not clear what OPEC’s next move will be.

Saudi Arabia’s energy minister Khalid al-Falih issued a word of caution regarding the newfound exuberance in Texas. The shale industry and its investors should not engage in “wishful thinking that OPEC or the kingdom will underwrite the investments of others at our own expense and long-term interests,” al-Falih said at the annual CERAWeek conference. “Saudi Arabia will not allow itself to be used by others.”

Saudi Arabia’s production cuts help push up oil prices, but they also run the risk of ceding Saudi market share to other producers. Stabilizing the market while not shooting itself in the foot is a high-wire balancing act that Riyadh is attempting to pull off. Khalid al-Falih said that shale drillers should not get ahead of the market, ramping up drilling to unjustifiable levels. He warned that there will be “no free rides” for non-OPEC countries. Related: IEA: Huge Oil Price Spike Inevitable

At the same time, OPEC officials went to lengths not to appear hostile towards the recovering U.S. shale industry, seeking dialogue to reduce the sense of competition. “We all belong to the same industry,” OPEC Secretary-General Mohammed Barkindo said to reporters.

In a sign that the competition between OPEC and U.S. shale – sometimes described as a war for market share – is evolving into something slightly more cooperative, Barkindo had dinner with nearly two dozen shale executives in Houston on the sidelines of the energy conference. By all accounts, OPEC officials were courteous and diplomatic, and hinted at greater cooperation, or at least understanding, with shale producers.

The engagement from OPEC officials has been received well in the U.S. "They’re trying to understand our business model," Pioneer’s Sheffield said of OPEC. "I think they’re trying to understand more about our ability to produce, what the cost structure is and what’s going to happen over the next several years."

“It was a very good exchange of information and views about oil," Hess CEO John Hess said on Tuesday. “I really commend the OPEC secretary general for the outreach. It was a good talk."

The upshot is that OPEC recognizes the importance of U.S. shale in the rapidly changing oil market. “It’s not so much ‘us-versus-them’ any more, but a watchful but peaceful coexistence,” IHS vice chairman Daniel Yergin said in an interview.

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The facts are that inventories continue to rise in spite of what rhetoric is coming out of OPEC. Demand is flat. When oil pulls back to $45 over the next week, then, they will wake up. Shale producers need to slow down a little also.

jman57 on March 09 2017 said:

Despite this article's claims, the OPEC and non-OPEC cuts were never fully realized, never made sense with regard to the OPEC increases that occurred over the last three weeks of 2016, and were mostly just talk to pump up the price of oil just like this olive branch-with-shale-producers talk. Just a day or two ago Saudi Arabia gave up on their role in reducing output to control prices because the rest of OPEC was woefully non-compliant (66%) so Saudi Arabia had to make up some of the difference. The OPEC deal basically fell apart this week and still these articles that claim they are all working together. Sorry but I call BS.

jqaman on March 09 2017 said:

be careful, if you tell these sly experienced businessmen too much, they will learn what they need to do to hurt you to get oil prices back up and take market share back. anyways, they never had a real deal to cut production. the countries exempted were going to keep pumping as much as they could and would negate any true reduction. also, the US shale uptick and the rest of the world were not going to slow down this new cash cow.